|Putting insiders inside|
|Friday, 13 May 2011 00:00|
Given that it took under 18 months from the time the SEC formally charged Raj Rajaratnam of insider trading to convicting him, it’s not surprising the case has got the kind of press it has. But what’s important to keep in mind, as WSJ notes, is that in the past 18 months alone, the SEC has charged 47 hedge-fund managers and others of insider trading, and Rajaratnam is the 35th person who has either been convicted or has pleaded guilty. It appears the next lot of work will be on what are called expert-networking firms, firms whose job is to get key personnel from firms to meet hedge-fund managers to offer tips, of the type Rajarathnam got regularly—“Ah Raj, eBay is gonna do massive layoff on Monday”, was one such he got from Anil Kumar, a McKinsey partner who pleaded guilty (three days later, eBay announced it was laying off 1,600 people).
Cut to India, and though Sebi has been able to crack insider trading cases from time to time—think Wockhardt and HDFC Mutual Fund—these are few and far between, and certainly there are no really high-profile cases. While some blame political pressure, the problem appears more deep-seated. Leave alone getting the power to do wiretaps of the sort that did Rajaratnam in, Sebi has been asking for call records but hasn’t been given them so far—just simple who-spoke-to-whom-when stuff. It did get call transcripts in the case of some mutual funds, but that’s because mutual funds tape their dealers as a matter of course. In the absence of strict privacy laws and a strong culture of enforcing them, the power to tap phones can lead to more trouble, of the type seen with leaks of phonetaps in recent months. What Sebi needs more than phone taps is a quantum jump in its forensics. Indian promoters tend to have hundreds of finance firms and subsidiaries who own subsidiaries—once these names are fed into computers on a 24x7 basis, tracking of their share activity is possible. The other solution is to reduce the ‘layering’ that firms do on a routine basis— just see the details of some of the firms accused in the 2G scam to understand this. Such lists with registrars of companies are typically incomplete and very often not digital. Similar family trees, as it were, are needed of business affiliates and, indeed, families—the definition of what comprises insiders has been whittled down over the years, from around 70 to 22 now. Above all, insider trading needs to be made a criminal offence—a R5 lakh fine for the Wockhardt CFO found guilty of insider trading (plus not allowing him to work as a compliance officer for 18 months) is akin to a traffic ticket.